The market rallied behind Nick Scali Limited's (ASX:NCK) stock, leading do a rise in the share price after its recent weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

See our latest analysis for Nick Scali

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Nick Scali increased the number of shares on issue by 5.6% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. Check out Nick Scali's historical EPS growth by clicking on this link.

A Look At The Impact Of Nick Scali's Dilution On Its Earnings Per Share (EPS)

Nick Scali's net profit dropped by 12% per year over the last three years. Even looking at the last year, profit was still down 19%. Sadly, earnings per share fell further, down a full 22% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Nick Scali's earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Nick Scali's Profit Performance

Over the last year Nick Scali issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Because of this, we think that it may be that Nick Scali's statutory profits are better than its underlying earnings power. In further bad news, its earnings per share decreased in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Ultimately, this article has formed an opinion based on historical data. However, it can also be great to think about what analysts are forecasting for the future. Luckily, you can check out what analysts are forecasting by clicking here.

This note has only looked at a single factor that sheds light on the nature of Nick Scali's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.